On the Subject of Privatization …

by John F. Infanger On Feb 13, 2009

LONG BEACH — The City of Long Beach, CA, like many across the nation, faces a budget shortfall, and is entertaining proposals to privatize various public utilities, including the Long Beach Airport under the FAA’s Airport Privatization Pilot Program. The discussion is in its early stages here, but acting airport director Chris Kunze says his airport has looked into the topic before and he sees little long-term revenue growth potential for a private operator. Yet, he says, privatization of airports may make sense for like communities that don’t have the restrictions that such a move at the airport here would face.

While the airport is city-owned, it operates under an Enterprise Fund, making it self-sufficient. Its airline operations are restricted by an agreement forged in the 1990s, but Long Beach Airport remains one of the busiest general and business aviation facilities in the U.S. and hosts Boeing and Gulfstream as major tenants.

AIRPORT BUSINESS recently discussed the privatization proposal with Kunze, it’s applicability, and the merits of such a move by others. Following is an edited transcript ...

AIRPORT BUSINESS: What is the status of the privatization proposal?

Kunze: The city’s general fund is looking at a pretty significant shortfall, around $15 million. The city manager is thinking outside the box regarding ways to address this.
We were not at all involved in any discussions about airport privatization. A few weeks ago, we were asked to attend a city council closed session to talk about a real estate transaction and the address was 4100 Donald Douglas Drive, which is the airport. It listed some seven or eight Wall Street finance firms.

The city was approached by a number of firms about the potential for privatizing city infrastructure, not just the airport. Some of the things they’re looking at, across the country, are toll roads; marinas; golf courses. We have our own gas department, water department.

It was the city manager’s desire to get some policy direction before anything else was done on it. We gave him the airport department’s position that privatization would basically be a non-starter here at Long Beach.

The closed session didn’t happen; members of the public saw the agenda and noticed it was airport and real estate negotiations and made a case to the city council [to rethink the closed session]. We’ve got a very sensitive community; we’re surrounded by homes and nice neighborhoods.

AB: And what makes you say that it is a non-starter here?

Kunze: We had looked at privatization over the years to see if it made any sense here. I always thought that it did at some airports, but not here.

Our sense is it’s not going to go anywhere here. At some airports that have our infrastructure and our marketplace, it could be a good option. The reason it would not work here at Long Beach, in my opinion, is because we have a very, very unique noise ordinance. It’s the result of 13 years of litigation; 14 airlines suing us. All the user groups were suing us, as well as 1,600 homeowners. There was finally a settlement in 1995.

We adopted a noise ordinance, and FAA grandfathered it under ANCA, the Airport Noise and Capacity Act, because we were in litigation when it was adopted. It allows 41 daily airline flights and 25 daily commuter flights. We have a very complex noise ordinance where we monitor every flight in and out; the noise level of that flight; and then we allocate that noise to a specific user budget.

There are five different budgets: airlines, commuters, general aviation, charter, and industrial operations. Every single event noise level that gets recorded in one of our 18 monitors ends up being put into one of these budgets. For the airlines and commuters, we have a community noise equivalent level budget, which is noise averaged over a 24-hour period. The baseline period is 1989. If they end up flying inside of their baseline noise budget, they can earn more flights.

So, at least for years to come, there won’t be any growth in that sector, and that’s where the potential to make money is. Any private entity that would come in and want to lease an airport for 99 years, the way they’ll make money — if they’re giving any substantial amount of money to a municipality — wouldn’t be through growth in airline activity.

Another reason why it wouldn’t make sense here is, one of our most important missions from the standpoint of the city is to protect local control and make sure that ordinance stays in place so that we don’t destroy our neighborhoods.

Another issue is, if we had hundreds of acres of undeveloped property, it might make sense if they could redevelop that property. But we’re totally developed here.

So, what other sources of revenue would entice a private operator? Well rates and charges; they could significantly increase fees. But under the [FAA] pilot program, 65 percent of the airlines have to approve any increases in rates and charges, other than CPI. That would be a non-starter.

The only other way to generate revenues would be to reduce costs. Well, we run a very lean operation. Roughly 30 percent of our operating costs are for police and fire, which we contract. The rest of it is demonstrated in our airline rates and charges; we’re fairly below the median in the industry. There isn’t a lot of fat to cut out there.

AB: The City of Chicago recently signed a deal privatizing Midway Airport, following similar deals for a local toll road and the city’s parking garages. Philosophically, what is your opinion of such moves?

Kunze: Some of those might work. The operating entity is giving up a long-term cash flow to get a discounted net present value now. In terms of long-term investment for a public entity giving that stuff up, maybe it’s not good as a long-term thing. But it’s solving a major deficit up front; hopefully, they’ll be smart about it and take those few years of super revenue and make structural changes so they can live within their budget by the end of the time they use up that billion dollars, or whatever.

AB: But what about the concept iself?

Kunze: I would think it’s not a cure-all, and not something that’s really going to change our industry. However, it’s worth looking at on a case by case basis. If you find something with a lot of developable property and you’re able to get somebody who is willing to lose money for some years to get a longer term return, it might be a good way to go.

If you have contiguous property that has a potential for good commercial and industrial development with an adjacent airport that they have direct transportation access to, it might make sense.

AB: In the U.S., the basic characterization of privatization is they’re just taking money out of the airport, and will raise rates and charges. Do you see that as the prevailing thought?

Kunze: I think so. If you look at the FAA program, I think the intent of that was to bring private capital to the table to increase capacity. There is a forecast capacity problem in the United States.

AB: What’s been the community’s reaction to the proposal?

Kunze: They’re not knocking on our doors yet, but we’re getting letters to the editor and stuff like that. One of them said that you should recall any council person who votes ‘yes’ on selling our airport.